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German Business Confidence Drops for Fourth Month as Risks Build

German business confidence declined for a fourth month, reflecting a faltering euro-area economy that European Central Bank President Mario Draghi says might need more stimulus.

The Ifo institute’s business climate index, based on a survey of 7,000 executives, fell to 106.3 in August from 108 in July. Economists predicted a drop to 107, according to the median of 39 estimates in a Bloomberg News survey.

Germany has been the engine of the euro area’s revival since last year and its resilience could be critical now as growth stalls and political tension with Russia threatens trade flows. Draghi signaled last week that he could step in with broad-based asset purchases as the region’s inflation outlook worsens.

“The German economy has been slowly sliding back, even if of course we come from a very strong situation,” said Jens-Oliver Niklasch, a fixed-income strategist at Landesbank Baden-Wuerttemberg in Stuttgart. “There’s a lot of uncertainty in Eastern Europe and we can see that the investment climate for companies is cooling off step by step.”

German gross domestic product fell last quarter for the first time in more than a year. While the 0.2 percent contraction was largely a consequence of a warm winter that shifted output into the previous three months, the Bundesbank has warned that a previously anticipated rebound in the second half of the year is now in doubt.

Russia Exports

The outlook has been clouded by escalating international sanctions against Russia because of its support for separatists in Ukraine. Russia has retaliated with bans on some food imports.

German electrical and electronic exports to Russia fell 19.8 percent in the first half of the year, manufacturers’ association ZVEI said last week. Investor confidence slid this month to the lowest level since 2012 and the ZEW Center for European Economic Research said economic growth will probably be weaker in 2014 than previously predicted.

The DAX Index (DAX) of German stocks has dropped about 7 percent since closing at a record high in early July.

Even so, gauges of German manufacturing and services slowed less than analysts forecast this month. The data signal a “swift recovery” in GDP, according to Markit Economics, which published the report. The number of people out of work declined in July and the jobless rate held at a record low.

Inflation Expectations

The Bundesbank predicted in June that the German economy will grow 1.9 percent this year. That compares with the ECB’s forecast of a 1 percent expansion for the 18-nation currency bloc as a whole.

The region’s economy stagnated last quarter, a year after it exited its longest-ever recession. Figures due Aug. 29 will show inflation slowed to 0.3 percent this month, the weakest since 2009, according to a Bloomberg survey.

Draghi said last week that medium-term inflation expectations have “exhibited significant declines.” That’s a situation he has previously said would justify broad-based asset purchases, or quantitative easing.

“The Governing Council will acknowledge these developments and within its mandate will use all the available instruments needed to ensure price stability over the medium term,” Draghi said on Aug. 22 at the Federal Reserve Bank of Kansas City’s annual economic symposium. “We stand ready to adjust our policy stance further.”

The ECB announced unprecedented stimulus measures in June that included a negative deposit rate. A plan to boost lending to the real economy by offering targeted loans to banks will start next month.